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Iraq is the first Arab country to be ruled by a Shia government since Saladin overthrew the Fatimids in Egypt in 1171. But Shia rule is deeply troubled, and Shia leaders have been unable to share power in a stable way that satisfies the Sunni, the Kurds and even the Shia community.

This is not wholly the leaders’ fault. They fear the Kurds want independence and the Sunni hope to regain their old dominance. Qusay Abdul Wahab al-Suhail, the Sadrist deputy speaker of parliament, says “the problem is that the Sunni do not accept power in the hands of the Shia”.

Prime Minister Nouri al-Maliki’s response to all this has been to grab as much authority as he can, circumventing agreements that would parcel out power in a nominally fair way, that, in practice, paralyses the state machinery. The government in the Green Zone, the great fortress it inherited from the Americans, is not shy about its sectarian allegiance. Shia banners and posters of Imam Ali and Imam Hussein decorate checkpoints and block-houses in the Green Zone and much of the rest of Baghdad, including prisons and police stations.

Mr Maliki’s efforts to monopolise power – though less effective than his critics allege – have alienated powerful Shia individuals, parties and religious institutions. Grand Ayatollah Ali al-Sistani, the pre-eminent Shia religious leader of immense influence, whom the Americans at the height of their power found they could not defy, will no longer see the Prime Minister’s emissaries. The marji’iyyah – the small group of men at the top of the Shia religious hierarchy – have come to see the Prime Minister as a provoker of crises that discredit Shi’ism and may break up the country. Iran, the only other large Shia-controlled state, with strong but not overwhelming influence in Iraq, says privately that it is unhappy with Mr Maliki, but does not want a political explosion in the country while it is facing ever-mounting pressure over Syria, its other Arab ally, and its economy is buckling under the impact of sanctions.

Iran tells Iraqi politicians it would like Mr Maliki to stay in office until the parliamentary elections in 2014 but maybe not thereafter. Muqtada al-Sadr, whose support has been crucial for Mr Maliki in the past, says he wants the Prime Minister to go, though the Sadrists remain an important part of his government. The idea of including all the opponents of the government within it may have seemed a good way of giving all interests a share of the cake, but means a leadership so fragmented that no decision can be taken.

The Sadrists’ position is the most interesting and significant because they have so frequently made the running in Iraqi politics before and after Saddam Hussein’s fall. They are highly religious, but also nationalistic and populist. In the 1990s, after the crushing of the Shia and Kurdish uprisings in the wake of the Gulf war, it was Muqtada’s father, Mohammed Sadiq al-Sadr (sometimes called Sadr II), and his movement who provided the most important internal resistance to Saddam. He was killed by government assassins, along with two of his sons, in Najaf in 1999. In 1980, Saddam Hussein had executed Muqtada’s cousin and father-in-law, Mohammed Baqir al-Sadr (called Sadr I), a founder of the al-Dawa party which Mr Maliki now leads.

After the US and British invasion, Muqtada opposed the US-led occupation and founded the Mehdi Army. When the US occupation authorities unwisely moved against him, his militiaman took over much of southern Iraq, an uprising that culminated in the siege of Najaf in 2004. I visited their cemetery – part of the Wadi al-Salaam, which is for all Shia and the largest cemetery in the world – where some 5,000 Mehdi Army fighters are buried. Large colour photographs of the dead, usually sincere-looking young men staring straight at the camera, form the headstones for the dead. Not far away, worshippers pray at the glittering tomb of Sadr II who was also called “the white lion” because of his snow-white beard.

The appeal of the Sadrists is also tribal and social: in the cities and towns the shopkeepers in the market oppose the Sadrists and the porters and labourers support him. The devout strongly feel the appeal of a dynasty of Shia martyrs who combine religious activism with a strong sense of Iraqi identity. Sadrist veterans say that their striking power and unity is enhanced by strong tribal bonds, particularly in places like Sadr City, their biggest stronghold with a population of three million people.

The Mehdi Army became the ruthless cutting edge of the Shia offensive against the Sunni after the blowing up of the al-Askari mosque in Samarra in February 2006. Thousands of tortured bodies were picked up in the streets of Baghdad over the next two years. For Sunni, Muqtada became a living symbol of the perpetrators of these atrocities against them, though he says the Mehdi Army was by then out of his control and he stood the militiamen down in 2007. It was later dissolved after bloody confrontations with government and US forces.

The Sadrists are seeking to transform themselves from a feared paramilitary organisation into a respected political movement. There are parallels here with the way Sinn Fein and the IRA in Northern Ireland demilitarised during the 1990s in order to gain power constitutionally and share it with their former enemies. Earlier this year Muqtada attended a Christian service in the Our Lady of Salvation Church in central Baghdad where some 50 worshippers had been slaughtered by al-Qa’ida in 2010. He later prayed in the Sunni Abdul-Qadir al-Gailani mosque in central Baghdad. He supports the protests in Anbar and Sunni areas on the condition they do not demand regime change. He said: “We support the demands of the people but I urge them to safeguard Iraq’s unity.” He attacked Maliki for giving the impression that the Shia want domination over Sunni, Kurds, Christians, Mandeans and Jews in Iraq. He added that “what was happening in Anbar is not a crisis, but a healthy phenomenon that reflects a popular and democratic movement.”

The Sadrists have gone back and forth with Mr Maliki over the last two years. They often denounce him but observers note that at crucial moments they appear to pull their punch. Muqtada, though often labelled by the Western media as a “firebrand cleric”, has always been a subtle and cautious politician, underestimated by the Americans during the occupation (“they never figured out that he was anti-Iranian”, says one Iraqi observer). Critics say the Sadrists are eager to have it both ways, simultaneously supporting and opposing Mr Maliki. In their defence, it should be said that the Kurds and other political parties behave similarly and this is the nature of Iraqi politics. Mr Maliki plays the same game, and, although the Sadrists have several ministers in his cabinet, he holds 600-1,000 of their militants in jail for fighting Americans and government forces before Muqtada reconciled with him.

Probably the Sadrists do not want to go into outright opposition to Mr Maliki until they know they can displace him. Diaa al-Asadi, a linguistics expert, former minister and the secretary general of the al-Ahrar bloc, as the Sadrist movement is called, says that in his personal opinion: “We are not talking about Maliki’s integrity or him being good or bad. He is a person who does not know how to plan. He is a simple-minded person. He is focused on undermining his enemies. He doesn’t have a vision of rebuilding Iraq.” He ticks off as acceptable the Sunni protesters’ demands, such as the release of prisoners, but adds: “There are some slogans used by the demonstrators saying there should be a revolution against the Shia because they come from Iran.”

The Sadrist movement is eager to show that it helps ordinary Iraqis who understandably do not believe that the state will do anything to aid them or, if it does, it will act only because of outside influence. At the Muhsin mosque in Sadr City last month two local Sadrist leaders, one a tribal dignitary, were sitting on a carpet with people, swiftly dealing with their requests and complaints.

“We use the tribal connection because of the weakness of the police,” said a Sadrist official. One man called Jassim al-Hamash said: “My house was destroyed in the fighting between the Americans and the Mehdi Army in 2008 and I am still looking for compensation.” He was told that the relevant government department would be contacted and asked to take action. Another man wanted squatters removed from his property and a third said that his community wanted to build three schools but was facing government obstructionism. He was told that a member of al-Sadr’s office would accompany government officials for discussions at the school construction site. He appeared satisfied. This belief that government will not do anything without backing or “pull” is correct and not so different from the operation of political machines in Boston, New York or Chicago in the late 19th and early 20th centuries.

Outside Baghdad in the overwhelmingly Shia south of the country, people are poorer than the capital, though security is better and the atmosphere more relaxed. There are more schools, hospitals, bridges and roads under construction. In the holy city of Najaf there is a continuing sound of drills and jack-hammers in the construction site in front of the golden-domed shrine of Imam Ali. Until recently, business was booming and dozens of hotels are under construction to meet demand from hundreds of thousands of Iranian pilgrims visiting the shrine. But economic sanctions on Iran have hit business and shops selling mementos and religious items are sacking workers. Everywhere in Iraq there is a hunger for government jobs, the only reliable source of employment. Diaa al-Asadi says he receives about 150 calls a day and most of them are about getting people jobs. Where one party is in control, as the Sadrists are in Maysan province in south-east Iraq, there are more signs of economic activity.

Amara, the capital of the province with about 500,000 inhabitants, has the benefit of 24-hours-a-day electricity from Iran. Even so, in a province with a population of 1.1 million, 130,000 are unemployed. One lesson is that a permanent supply of electricity is essential for the restoration of a normal life in Iraq. Relying on small generators is not enough, particularly when people need air-conditioning and fridges in the scorching summers. Farmers lack power to pump water from the rivers to their fields and orchards, which they then abandon. Prices have gone up. It used to be said in Iraq that “if you are poor, live on bread and tomatoes” but tomatoes that once cost 40¢ a kilo now sell at the equivalent of over a dollar.

After visiting the cities of southern Iraq on the Tigris and Euphrates rivers I was left with the impression that in the Shia heartlands, development is painfully slow even if it is more evident than in Baghdad. Saddam Hussein’s wars and UN sanctions mean that very little was built for 30 years. People need jobs but lack skills. Slums in Basra looked terrible before 2003 and they still do. Heaps of rotting garbage line the streets often with empty garbage trucks mysteriously parked beside them. Herds of goats graze on them. A local official in Basra explained “the minister knows about this but can’t get his director generals to do anything.”

Iraqi politicians say the Sadrists may lose some votes in the local elections in April because of Muqtada’s openly expressed sympathy for the Sunni protesters. “But in the long term I expect they will be kingmakers who decide what happens after Maliki,” said one leader.

Yet, all these calculations may become obsolete if Iraq is destabilised by the reverberations from the war in Syria. The moderation of the Sunni protesters in Anbar and the sympathetic response of Sadrists is important because these were the two main protagonists in the sectarian civil war six years ago. But suspicions run deep and people fear the ingredients are there for a new sectarian war, however much the thought horrifies them.

How the Kurds Struck It Rich

Kurdistan presents itself as the new economic tiger of the Middle East, flush with the prospect of exploiting its oilfields. The tall towers of two new luxury hotels rise high above the Kurdish capital Erbil, the oldest inhabited city in the world whose skyline had previously been dominated by its ancient citadel for thousands of years.

Nearby, a glittering new airport has replaced the old Iraqi military runway. In contrast to Baghdad and other Iraqi cities the cars in the streets look new. Above all, and again in sharp contrast to further south, there is a continuous supply of electricity.

“I cannot find employees to go and work in the oilfield,” complains a Kurdish manager in a Western oil company. “I cannot even find rooms in the new hotels for visiting executives because they are so full.” Convoys of shiny black vehicles conveying delegations of visiting businessmen from Germany, France, the UAE and Turkey race through the city. Many of those now coming to Kurdistan could not have found it on the map a few years ago and – so Kurds who have met them caustically remark – are often still unsure of its location when they leave. But there is no doubting international business enthusiasm for the Kurdistan Regional Government (KRG), the semi-independent enclave in northern Iraq that is prospering like no other part of the country. A Kurdish businessman says: “We are benefiting from having a boom at a time of austerity and slow growth in the rest of the world, so the boardrooms of international companies are particularly interested in us.”

At the heart of the boom are 50 or 60 foreign oil companies seeking to find and exploit Kurdistan’s oil, on better terms and with greater security and official backing than they could find in the rest of Iraq. This influx started with small and obscure foreign companies in the years after the fall of Saddam in 2003. But foreign interest deepened, the size of the oil companies increased, and in 2010 ExxonMobil signed an exploration contract with the KRG. The central government in Baghdad was furious and threatened to punish Exxon, which has large interests in southern Iraq, but failed to do so as other oil majors – Chevron, Total and Gazprom – had also signed their own deals.

When the Kurds first encouraged foreign oil companies to look for oil on territory they controlled, Baghdad was sanguine. In 2007 Iraq’s Oil Minister Hussein Shahristani, now Deputy Prime Minister in charge of energy-related issues, said to me that, even if foreign oil companies found oil, they would not be able to export it. He asked sarcastically: “Are they going to carry it out in buckets?” It is this calculation that has changed radically in the last year. A new pipeline is being built between the KRG and Turkey, which in theory would enable the Kurds to export crude and get paid for it without permission from Baghdad. This would give the five million Iraqi Kurds an economically and politically independent state for the first time in their history after decades of war, ethnic cleansing and genocide. On the other hand, Turkey may decide that it is not in its interests to defy Baghdad and break up Iraq.

Self-determination is close, but not quite there yet. One Kurdish observer said: “We Kurds have one of the most complicated political situations in the world.” It is easy to forget this in the present boom-town atmosphere of the KRG. First, the Kurdish autonomous zone is landlocked and on all sides faces powers – Turkey, Iran, Syria and the rest of Iraq – that are oppressing Kurds or have oppressed them in the recent past. The KRG may be a haven of peace for the moment but violence is not far away. Syria, Iraq and Turkey are fighting guerrilla insurgences of varying levels of intensity just beyond the KRG’s frontiers. In recent weeks al-Qa’ida suicide bombers blew up the main police station in Kirkuk 50 miles south of Erbil and assassinated a senior general and his bodyguards in Mosul, a similar distance to the west.

The political geography of the Middle East is changing in ways that so far are to the advantage of the Iraqi Kurds, though the trends may not always be so. The KRG consists of three provinces – Erbil, Dohuk and Sulaimanya – that won de facto autonomy in 1991 after the Kurdish uprising in the wake of the first Gulf War. This area expanded dramatically in 2003 as the Kurdish pesh merga militiamen advanced and Saddam Hussein’s forces collapsed. The Kurds captured Kirkuk and its oilfields as well as a swathe of territory north and east of Mosul and have never been likely to give it up. An explosive aspect of the deal with ExxonMobil in 2010 is that three of its six exploration blocks are outside the KRG, but inside territories disputed between Kurds and Arabs and between the governments in Erbil and Baghdad. Last year pesh merga and Iraqi troops confronted each other along the so-called “trigger” line, stretching from the Syrian to the Iranian border.

It is a moment of unprecedented political change in the region. Iraq as a country is getting close to disintegration as a single state, but this is not inevitable. Old alliances are being junked and hated enemies embraced. Massoud Barzani, long demonised in Turkey, was a guest at the conference of Turkey’s ruling AKP party and was given a standing ovation. The Iraqi Kurds are tipping towards Ankara and away from Baghdad. For a decade Turkish companies have poured into KRG and are doing trade worth at least $8bn (£5.3bn) a year there. The Shia-Kurdish alliance is the backbone of the post-Saddam settlement brokered by the Americans, but is today it is looking frayed. Mr Barzani and the Iraqi Prime Minister Nouri al-Maliki are barely on speaking terms. The Kurds feel, as do other opponents of Mr Maliki, that he has repeatedly reneged on power-sharing agreements, particularly when it comes to military and security appointments.

When it seemed likely in 2003 that the US would invade Iraq from the north accompanied by 40,000 Turkish troops, the Iraqi Kurds were terrified and demonstrated vigorously in protest. These days a Turkish alliance with the KRG appears to many to be a reassuring alternative to dealing with the chaotic and increasingly hostile government in Baghdad. Arab-Kurdish links are weakening at many levels. At the top, Kurdish influence in Baghdad is declining, particularly since the incapacitating illness of President Jalal Talabani who had previously played a conciliatory role at the centre of Iraqi politics. At street level fewer Kurds speak Arabic compared to 20 years ago when many were former conscripts in the Iraqi army. Few Kurds travel to Baghdad except for urgent business because it is dangerous, though many travel to Turkey on holiday. Only a few years ago the Turks would regularly close the Khabour bridge, the main crossing point between the KRG and Turkey, leading to enormous traffic jams. These days it is Baghdad that tries to emphasise the KRG’s isolation, refusing even to allow the plane carrying the Turkish Energy Minister to cross its airspace for a conference in Erbil.

Kurdistan has changed enormously in the last decade. At several moments over the last 40 years the Kurdish cause seemed irretrievably lost. In 1975 their forces, then led by Mullah Mustafa Barzani, the father of the current KRG President Massoud, were betrayed by the US and the Shah of Iran who suddenly withdrew support as the Kurds were locked in battle with the Iraqi army. Saddam Hussein seemed triumphant and Kurdish prospects for self-determination were apparently extinguished forever. But the Shah fell and Saddam invaded Iran in 1980, leading the Iranians to renew support for the Iraqi Kurds. They took over much of the country, only to see Iran forced to agree a truce in 1988 leaving the Kurds to face Saddam’s vengeance. Many were gassed in Halabja and 180,000 civilians slaughtered in the al-Anfal campaign in 1988 and 1989. Again, everything looked dark for the Kurds until Saddam invaded Kuwait and was defeated in 1991. The Kurds rose up, failed to get US support, and were forced to flee in their millions in the face of an Iraqi counter-attack. In the midst of an international outcry, US relented and rescued the Kurds by declaring a no-fly zone.

But Kurdistan was devastated. People had been forced into cities and 3,800 villages and towns were destroyed. This was oppression on the level of Hitler’s armies in Poland and Ukraine. The very land was carpeted with anti-personnel mines like large yellow and white mushrooms. The mountains were stripped bare of trees for heating and cooking. The two main parties – the Kurdistan Democratic Party of Mr Barzani and the Patriotic Union of Kurdistan of Mr Talibani – made a bad situation worse by fighting a ferocious and wholly unnecessary civil war.

The contrast between Kurdistan as a ruined battlefield and its appearance today is so striking as to take one’s breath away. It may also be so great as to unbalance its leaders’ sense of the feasible. One critic says: “We are making the same mistake with the Turks today as we did with the Americans and the Shah in 1975. We are once again becoming over-reliant on foreign powers.” For all the economic development in KRG it remains dependant on getting a 17 per cent share of Iraqi oil revenues proportionate to its population. The KRG likes to present itself as “the other Iraq” so different from the rest of the country. But some things work the same. For instance, some 660,000 Kurds have official jobs though at least half do nothing at all. Much government revenue goes on paying them and without a share of Iraq’s oil revenues the economy would collapse. “Ease of doing business in Erbil compared to Baghdad is very good,” says a businessman. “Compared to the rest of the world it is rubbish.” A sign that many Kurds do realise their continued economic dependence on Baghdad is a sharp drop in the last three months in property prices in Erbil, a fall attributed to disagreements with Baghdad.

Kurdistan may have greater security and better political direction than Baghdad, but it is similarly corrupt. “I call it ‘Corruptistan’,” said one woman. “I live in an area surrounded by the houses of director generals working for the government,” said another source. “I have a higher salary than any of them but they have houses three times bigger than mine.” He complained that it has taken him months to find a decent school for his daughter and, likewise, a good hospital for a sick friend. Erbil may have several five-star hotels, but so few ordinary Kurds visit them that local taxi drivers often do not know where they are.

In many respects the exaggerated expectations generated by the Kurdish tiger resemble those surrounding the Celtic tiger in Ireland before 2008. Both nations are small, long-oppressed and impoverished, and feel history has treated them unfairly. Having endured hard times for so long, both may be vulnerable to seeing a boom as being permanent when it is in fact part-bubble.

Momentous decisions must be taken by the Kurds and their neighbours when the pipeline to Turkey is finished. One expert on Kurdistan asks “is Turkey playing a game of bluff or will it give up on Baghdad? Do they see it as having fallen permanently into the hands of Iran?” The Kurds are gambling for high stakes in balancing between Turkey, Iran and Baghdad. They have hitherto done so with success but they are in danger of over-playing their hand.